Business

Wednesday May 21, 2008

Financial sector produces mixed results


PETALING JAYA: The results recently released by the financial sector have largely been mixed, with some missing estimates and others outperforming market forecasts (see table).

Analysts contacted by StarBiz are not overly concerned over earnings in the sector going forward.

Aseambankers senior analyst Wong Chew Hann said anticipation that the financial sector could be in for hard times in the second half “may not be so”.

“It will be flat,” she said of earnings.

Bumiputra-Commerce Holdings Bhd, the largest player in the segment, has told analysts that the group expects some deals to come in during the second half, thus boosting non-interest income.

Wong said barring any major political disruption which could dampen sentiment for corporate issues, earnings from non-interest income for the sector could improve.

She added, however, that net interest margin could come under pressure but expects strong loan growth to offset the margin erosion, adding: “It's not going to be exciting but it won't be bad.”

Banking sector loans growth is closely related to economic performance.

While some economists see a slower second half for Malaysia, many expect any slowdown in the US to be offset by internal demand from the regional economies.

As for Malaysia, there was the advantage of being a large exporter of commodities, which would help offset inflationary pressures from booming commodity prices.

Standard & Poor's Equity Research Asia director of research Lorraine Tan said in a May 14 report the outfit remained overweight on “financials” in Malaysia.

The research house saw “value among some banks, given the sustained economic growth outlook and limited subprime exposure”.

At the same time, S&P Research Asia is underweight on industrial stocks as it expects margin pressures to continue.

Tan said: “The good news for most emerging Asian banks, and particularly Malaysian banks, is that organic loans growth is relatively stable and the proportion of treasury instruments is minimal.

“As such, we anticipate little risk to most Asian financials and are in fact overweight on the sector in Asia.”

However, Tan added that there remained risks that tempered S&P Equity Research Asia's outlook.

“Although it would appear that the credit crunch has dissipated, we believe that there remains the potential for additional writedowns by banks exposed to the US market,” she said.

While no Malaysian banks are expected to be directly affected, any bad news is likely to dampen sentiment and lower risk appetite.

S&P believes that speculative default rates should rise to a long-term average of around 4.7% by the end of the first quarter of 2009.

As at the end of the first quarter this year, the default rate was 1.4%.

Although no monetary quantum has been extrapolated, S&P Equity Research Asia estimates that this could amounted to over US$600bil.

Hence, there is a likelihood of additional writedowns as only around US$150bil has been written off to date.

Earnings risks also remain should inflation continue to remain stubborn and if US consumption slows more than expected.

“Last but not least, there remains political uncertainty in Malaysia,” Tan added.

Until this “elephant” left the room, the market was expected to have limited breathing space, the S&P report said.

“With valuations at comfortable levels and with the expectation of new policies potentially leading to greater operating efficiency, we believe that sustained market underperformance would be unlikely,” it added.

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